Trading Grain Spreads Using a Fundamental Approach
- Thread starter local
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I think it depends on the contract. I can't speak specifically to the nat gas but I have seen it in some of the smaller ag contracts over the past couple of years. It is sometimes difficult to find contracts where funds make up a significant short simply because some, but not all, are mandated to trade from a long only position. However,last year I did trade a contract where the spread did narrow for exactly the reason you suggested. From my perspective, the shorts did not understand the contract specs because if they did they would have realized the position limits are extremely prohibitive to the long, that is it is almost impossible for the long to stand for delivery for an amount that would prevent the spread from gravitating to carry.
Further to the wheat COT - Swap dealers are long 195,000 contracts which repesents 40% of the open interest. Managed money long 65,000, 14 % of open interest. End users are long 10% of the open interest. When you have the open interest skewed by that much, it signals a problem. Also important is the fact that the swap figures are being carried by just 16 traders, a very small number, if they should ever liquidate their position it could become very significant. This begs the question, who is going to offset their position, end users are not using the contract as a hedge.
Regards, local
Il Principe
Guest
Looks like it is game back on. Good exports (sale to unknown thught to be China) and fund selling coming to an abrupt end has the N/Z corn being bought early tonite. Now that funds have reduced their positions, fundamentals can dictate spread. Drop in flat price has apparently attracted end user demand.
Regards, local
Regards, local
Carying charges are the sum of storage and interest costs.
For some commodities the carrying charges are listed by the exchange. For some (wheat) the storage rate may change from one delivery month to the next. In this case you have to refer to the contract specifications to determine if carring charges will increase or decrease. Something that should be noted from variable storage rates. Where variable storage rates continuously increase as has been the case over the past year for wheat, the contract becomes less valuable as a hedge or a spec position. The VSR for wheat was implemented about a year ago and has effectively increased storage rate(and therefore carrying charges) to a point where it is costing longs 23 cents/ month to roll positions. Proving to be excessive for a commodity with a flat price of $8.00.
Regards, local
There is a group of floor grain spread traders who blew out in May. Cost of carry basis models. Ex-commercial guys. One of them posted here frequently.
Anyone who seriously believes that the electronic markets have not priced in some important piece of fundamental information is delusional.
Every substantial player including Cargill, ADM, etc. etc. all have electronic execution screens on their desks and they have staff meteorologists and former Dept. of Agriculture employees on the payroll.
And their opinion has indeed been expressed in the last price print you see. They do not, will not, and never will leave money on the table. They are not lazy. They get a performance bonus.
Anyone who seriously believes that the electronic markets have not priced in some important piece of fundamental information is delusional.
Every substantial player including Cargill, ADM, etc. etc. all have electronic execution screens on their desks and they have staff meteorologists and former Dept. of Agriculture employees on the payroll.
And their opinion has indeed been expressed in the last price print you see. They do not, will not, and never will leave money on the table. They are not lazy. They get a performance bonus.